ECB Article Examines Impact of Sovereign Risk on Corporate Credit Risk

The article concludes that when a country sees its sovereign credit risk rise, companies in that country also see their credit risk increase. Companies with a large public-sector ownership, in addition to the companies that borrow heavily from banks, are most affected. This suggests that the transmission of credit risk from sovereigns to non-financial companies occurs primarily through a fiscal and financial channel.

The results of the investigation also highlight the importance of reducing the likely spillovers of sovereign risk to corporate credit risk, for example, via the Capital Markets Union. With the ambition to further develop market-based sources of finance in Europe, the Capital Markets Union may help contain both the fiscal and the financial channels of risk transmission. This is because it would stimulate non-financial corporations to use more diversified sources of finance, for instance substituting part of the their bank lending by issuing larger amounts in more liquid corporate bond markets. The article concludes that, if companies rely less on bank lending and government support, they should be better protected from serious banking crises and sovereign distress.

Related Link: Research Bulletin Article

Keywords: Europe, EU, Banking, Insurance, Securities, Sovereign Risk, Credit Risk, Capital Markets Union, Market Based Finance, Research, ECB